FTC Non-Compete Rule Has an Uncertain Future Concerning Its September 4 Effective Date

Many lawsuits have been filed against the Federal Trade Commission (FTC) non-compete rule which is effective 120 days following its May 7, 2024 publication in the Federal Register that will likely delay its effective date pending a final ruling on its legality.  It is important to know the important particulars of the rule, so employers can properly plan for the contingencies.  

The rule generally bans all new post-employment non-competes and invalidates all existing post-employment non-competes, and prohibits the enforcement of any post-employment non-compete.  There is a limited exception for pre-existing non-competes for senior executives, but not non-competes with senior executives entered into after the effective date.  A senior executive is defined as "a worker who was in a policy-making position" and who received a total annual compensation of at least $151,164.00.  Since the rule is not yet in effect, some employers may decide to enter into post-employment non-compete arrangements with senior executives prior to the rule's effective date on September 4, 2024.

The rule also excludes any causes of action accrued before the effective date of the rule, among other important changes in the new rule.  The rule excludes all non-competes entered into in connection with a bona fide sale of a business, without regard to the seller's ownership interest, dropping an initial threshold that required a 25% equity threshold.  It also removes the de facto non-compete language and does not necessarily prevent employers from entering into other forms of restrictive covenants such as certain non-disclosure and non-solicitation restrictions, as long as they are not written so broadly as to constitute de facto non-compete clauses.  The rule also excludes non-competes in franchisor-franchisee relationships and non-competes imposed by non-profits.  

Many companies will make the decision that due to the legal uncertainty, they will in the meantime continue to operate in the ordinary course including continuing to enter into employment non-compete agreements.

Some planning for the future would be prudent.  For example, severance plans need to be reviewed containing non-competes, with consideration given to converting them to "garden leave" plans, where a worker continues in employment for a severance period and can thus therefore be prohibited from competing during such employment.  Further, more emphasis will be placed on non-disclosure and trade secret agreements, and non-solicitation restrictions, which generally are not covered by the new rule.  Some employers as to executives may attempt to structure equity-based non-compete programs as investment-based, rather than employment-based.

This article is part of our June 2024 Newsletter. 

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